Facebook and Apple Are Knocking Down PayPal's Doors

By the numbers, eBay's (NASDAQ: EBAY) PayPal may be entering a battle that it cannot win. Until now, PayPal has been the payment processing king, with no real competition, thus making its 143 million users the largest of any online platform. However, in a new world of large ecosystems and social media, such as Apple's (NASDAQ: AAPL) iOS and Facebook (NASDAQ: FB) , PayPal is one large competitor away from seeing its growth significantly threatened.

PayPal: King of payment processing, for nowPayPal's 143 million users is considered large by any standard, and with that user base, PayPal accounted for more than 40% of eBay's $16 billion in total revenue in the last 12 months. Moreover, PayPal is expected to become a $10 billion business by 2015, and with its high margins -- PayPal generated nearly all of eBay's $2.86 billion in net income last year -- is very valuable to the company.

PayPal has yet to be challenged with a similar business model that has an equally large user base. However, a slew of new companies are now stepping up to the plate, obviously having seen a large market opportunity.

Bad news for eBayEarlier this month, the Financial Times reported that Facebook is preparing to launch an electronic money service. The social media giant is currently in discussions with the Central Bank of Ireland to allow customers to store, pay, and exchange currency through its platform. Thus, Facebook's payment system will be very similar to PayPal.

In a previous article, Facebook's entrance into the payment industry was discussed, and with 1.2 billion users, the conclusion was that, if Facebook uses a similar system to PayPal, it could generate $10 billion fairly easily because, after all, Facebook has nearly 10 times the users of PayPal, and thousands of large and medium-sized businesses already using its platform.

It gets worse for eBayAs if Facebook wasn't bad enough news for eBay, numerous reports this year suggest that Apple is developing a similar service, and that it is high on the company's list of priorities. The Wall Street Journal initially reported in January that Apple was acquiring patents related to payment processing. Then, on Monday, re/code reported that Apple was not only interviewing senior level management for the service, but was in fact building the service.

What does this mean for all parties involved?For Facebook, a new payment system could double its annual revenue. The company will likely integrate payments in a way where retailers can post merchandise on the site that can be bought directly from Facebook, which means that advertising will become even more valuable.

For Apple, $10 billion in revenue is large, but not enormous or especially meaningful as it relates to the entirety of its $170 billion business. Instead, it will likely be touted as yet another advantage to using iOS in comparison to other operating systems.

In terms of numbers, Apple has more than 600 million users who already have iTunes accounts, and who also have credit card information stored. Therefore, a payment processing system shouldn't be too difficult, and will be convenient for app developers. Additionally, Apple's fingerprint sensor will likely play a large role, as originally reported, thus making purchases particularly simple.

PayPal clearly has the most to lose, as much of eBay's valuation is tied to PayPal. In retrospect, 144 million users is small, relative to the user bases of both Facebook and iTunes. As a result, PayPal will be the company that suffers.

Final thoughtsGiven the latest developments surrounding payment processing, including Facebook and Apple's interest, investors should keep in mind eBay executives' hard stance on keeping eBay and PayPal as one company.

Carl Icahn had asked for a PayPal spin off, as have many other investors over the last five years, yet eBay management insists the company is better as a pair. However, if not for the eBay connection, and if PayPal were an independent company with a separate board and management, it's possible that PayPal would have struck a deal with Apple, Facebook, and others to provide large-scale payment processing. Instead, eBay has always viewed PayPal as its advantage, and in the end this notion might actually hurt eBay.

Currently, any conclusion is speculative, but looking at the numbers alone, both Facebook and Apple have an enormous advantage, and eBay has a lot to lose.

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eBay's "PreyPal" may well be clunky, but no more so than any of the other "middlemen" payments pretenders that ride on the backs of the banks’ existing systems; PayPal's real handicap is it's ugly adoptive mother, eBay ...

“PayPal has yet to be challenged with a similar business model that has an equally large user base.”

More rubbish! PayPal’s real threat is from the banks themselves. Best you take a look at the new digital wallet offerings from Mastercard (“MasterPass”) and Visa (“V.me”) …

As far as “payments” are concerned, there are already two elephants in the room, the “bankcards”, MasterCard and Visa; if anyone thinks that there is room for anyone else to be given interactive access to the banks of the world’s customers’ accounts, I think that they are dreaming. There simply is no way that the world’s banks are going to let every “payment pretender” have direct, unfettered access to their customers’ funds—that would undoubtedly create a nightmare for the banks.

You only have to follow the negative comments all over the internet about PayPal’s Credit Card Merchant Account operation to understand the potential problems involved for the banks with such “middleman” operators. Indeed, the suggestion is that “PreyPal” is now applying more, and lengthy, holds on their payee’s funds because “the banks” have put “PreyPal” on notice that they are not happy with the ever-increasing number of complaints from their card users about PayPal’s unsatisfactory customer support and, apparently, non-existent transaction dispute mediation process. Apparently, “PreyPal”—unlike the banks—will not invest in the human resources necessary to professionally moderate such disputes, and will not now defend a charge-back by a buyer—even if it is defensible; “PreyPal” will now simply deal with the matter in the most self-interested way for them, and that is to acquiesce to the chargeback and let the payee carry the can. The reality is, anyone that accepts payments via “PreyPal”—or any other third-party payments “pretender”—does so at their constant peril …

Regardless, as others have said, the banks and MasterCard/Visa already have an enormous installed base of “tap and go” NFC terminals, mandated for use by October 2015; and, the resulting “Chip and PIN” operation, via card or phone, could not be any simpler (particularly by card), or more secure …

Apple undoubtedly already well understands this situation and I doubt they have any serious idea of trying to expand their payments system outside of their own sales. I therefore wonder if these “stories” are not simply the work of the fertile imaginations of those media release regurgitators that today disguise themselves as journalists …